In a world with an intellectual history of seven thousand years behind it, where do Pakistanis stand, what are they doing, what do they aspire to be, and what ought they to be doing? This Blog takes Notes of all of that ...

Tuesday, September 3, 2013

All is set for the executive board of the International Monetary Fund
(MF) to consider Pakistan’s request for a fresh bailout package on September 4,
2013 after Islamabad has purportedly “fulfilled all prior requirements” — the
IMF has already circulated amongst members the Letter of Intent (LoI) it received
from Islamabad. Reportedly, though the IMF has agreed to provide $6.6 billion
under the Extended Fund Facility (EFF), Islamabad is insisting on $7.3 billion
confirming its insatiable ‘debt addiction’.

Finance Minister Ishaq Dar, in a news conference on August 26, 2013,
revealed that “in the first year, the IMF will give $2.2 billion while we have
to pay back over $3 billion.” He conceded that Pakistan had no option but to
borrow $12 billion “to retire its previous debts”. Dar said the “most vital precondition
of the IMF for broadening of tax base was fulfilled as the Federal Board of
Revenue (FBR) had already issued 15,000 notices to potential tax dodgers.”

The lingering and deepening economic crisis, especially bourgeoning
fiscal deficit, has been eroding Pakistan’s capacity to repay huge external
loans of over $60 billion with fast diminishing foreign reserves. The IMF,
having enormous stakes in Pakistan before agreeing for fresh tranche, expressed
anguish and dissatisfaction over the FBR’s performance — in particular what it
calls fixing ‘ambitious targets’ and then missing the same with a wide margin
every year. The dismal performance of the FBR — it collected only Rs1940
billion against the original target of Rs2381 billion for 2012-13 pushing the fiscal
deficit to 8.8 per cent of GDP — worried the IMF about repayment of its
outstanding debt of $6.4 billion. The fresh bailout is, thus, nothing but to
thwart the obvious default.

The IMF’s compulsion to offer yet another EFF to Pakistan is inevitable
as foreign exchange reserves are dwindling and agreed schedule for repayments
of $7.6 billion till the end of 2014-15 by Pakistan is in jeopardy. Pakistan’s
$11.3 billion Stand-by Arrangement (SBA) with the IMF expired on September 30,
2011 with last two tranches of $3.7 billion could not be paid following
Islamabad’s failure to implement key reforms coupled with fudging of revenue
figures.

Pakistan opted for $11.3 billion SBA in 2008 and got disbursements of
about $7.6 billion, but failed to get the remaining $3.7 billion due to lapses
in performance criteria, leading to suspension of the programme in May 2010,
and final unsuccessful ending on September 30, 2011.

In the current fiscal year, the FBR is assigned a target of Rs2475
billion. Like previous years, the FBR is claiming to cross the target! Experts
are doubtful in view of recession and weak enforcement capabilities of the FBR.
The track record of the FBR shows that it has perpetually missed targets for
the last five years. The performance of the FBR is puzzling for the IMF and
other donors as in the past World Bank provided $100 million for five-year-long
Tax Reforms Administration Program (TARP) and on conclusion tax-to-GDP ratio
declined from 11 per cent to 8.2 per cent and tax gap increased from 75 per
cent to 150 per cent.

Strangely, after wasting billons in the name of reforms, the FBR is
showing helplessness to enforce tax laws. Every now and then the FBR’s big
bosses claim “we possess data of all the rich persons who spend millions but
have never filed tax declarations.” Why they do not take action against these
tax cheats is best known to them. They admit in private that about 70 per cent
of legislators are tax cheats.

Pakistani tax cheats have just to approach money exchange companies that
fix fake remittances for a small premium and no question can be asked by tax
authorities about the source — in the presence of such a facility, their claim
is why we should pay tax at the rate of 25 per cent! Tax evasion has legal
protection in Pakistan and legislators are to be blamed as well.

There are about 125 million mobile users in Pakistan, out of which at
least one million, if not more, expend Rs60,000 or above per annum but never
bother to file tax returns. If they are taxed on their real incomes, total tax
from them would not be less than Rs5000 billion. The real tax potential of
Pakistan is not less than Rs8 trillion — direct taxes of Rs5 trillion and
indirect of Rs3 trillion — but the government is begging for money both
externally and internally. Nobody questions the enormous tax benefits available
to Riasti Ashrafiya (State Oligarchy) — ‘Public
parasites’, The News, July 21, 2013.

No doubt that the FBR should improve its enforcement capacity to detect
tax losses, but it suffers from “helplessness” caused by obnoxious provisions
like section 111(4) of the Income Tax Ordinance, 2001. The corrupt legislators
through such provisions protect themselves — their main assets are banami [in
fake names]. With such laws and innumerable Statutory Regulatory Orders [SROs]
they serve the interests of mighty segments of society.

Ordinary people ask why they should file tax returns when their president,
prime minister, ministers, governors and elected representatives give damn to
it. The outgoing president, since his election on September 6, 2008, never
bothered to inform the nation from where he got $60 million (unfrozen in
Switzerland), let alone pay any tax on this colossal amount. Before taking oath
of president, he did not declare his assets and liabilities and evidence of
payment of taxes wherever due. The same is true with present rulers and many
other politicians. We have written time and again in these columns that the tax
culture in Pakistan will never take roots unless tax and asset declarations of
all the mighty segments of society — politicians, high-ranking military and
civilian officials, judges and all public office holders — are made public
[Taxation challenges, The News, June 9, 2013].

There should be a public campaign that absentee landlords, most of whom
are members of parliaments and their siblings are members of
militro-judicial-civil complex, should reveal how much agricultural income tax
was paid by them and their near and dear ones. All the judges, high-ranking
public servants, including serving and retired generals, should also be
required under the law to make public how many plots they received during
service, what are total assets owned by them and their family members and how
much tax was paid annually.

Any person who is a tax delinquent or has been beneficiary of any loan
write-off should be debarred from contesting elections. All kinds of exemptions
and concessions provided under various tax codes should be withdrawn.

The tendency to squeeze more and more from the existing taxpayers and
giving a free hand to non-filers has eroded the tax system to an extent where
voluntary compliance and tax enforcement have lost their relevance. The present
tax system imposes greater and undue burden on the poor and middle-class people
(e.g. 17 per cent GST takes larger portion of low-income groups compared to
high income groups). The rich and mighty are not paying agricultural income tax
and income tax on their non-agricultural income. Most of them are
landowners-cum-industrialists-cum-politicians and are engaged in massive tax
evasion — case of cartelisation and tax evasion bonanza in sugar industry is a
classic example.

Adding insult to injury, the tax collected from the citizens is wasted
on unprecedented privileges and perquisites meant for elites —
militro-judicial-civil complex, landed aristocracy, industrialist-turned
politicians and unscrupulous businessmen.

We will not come out of present mess unless control of resources vests
with people instead of elites. Institutions like the FBR serve the interest of
mighty classes. They would continue to do so till the time people of Pakistan
exert pressure on provincial governments to devolve fiscal and administrative
powers at grass root level to local self-governments. Fiscal decentralisation
and municipal self-governance can end dependence on federal government that is
epitome of bad governance.

As regards reforming the FBR, as a first step the posting of chairman
and members should be made through public hearings by a joint committee of
Senate and National Assembly and not on the whims and dictates of the ruling
political party headquarters. All kinds of loopholes in tax laws should be
plugged by proper legislation. No executive authority should have powers to
amend tax laws through infamous SROs.

Through public debates and democratic processes, the Parliament should
pass rationale and workable laws after taking inputs from all the stakeholders
and experts in the field. There should be zero tolerance in respect of
enforcement of tax obligations across the board without any fear or favour. Tax
collected should be spent for the welfare of the masses and not for the
luxuries of state oligarchy.

[The writers, tax advisers and author of many books, are Adjunct Faculty
at Lahore University of Management Sciences (LUMS).]

The Blogger

The blogger cherishes a cosmopolitan spirit; he is a moralist; a rationalist; a philosopher; a political philosopher; he believes in Classical Liberalism, as a Theory of Conduct.
He has substantially contributed to the founding of the first free market think tank of Pakistan, Alternate Solutions Institute.
He is a writer who wrote / published dozens of articles on a variety of issues, and is author of 4 books.
He wrote / published short-stories in Punjabi, a regional language of Pakistan.
He composes poetry both in Urdu and Punjabi, and has already published one collection.